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Can Electronic Arts Keep Up on the Battlefield With Gaming Stocks?

Chris Lau, Kapitall: Video game stock Electronic Arts is down 21% since September, is it ready to turn things around?

Since peaking in September 2013,
Electronic Arts (EA) declined by 21%. The selloff accelerated on December 5 with heavier volume as well, after the company decided to stop new development for
Battlefield 4. EA wants to address stability issues plaguing the game.

Even though sales could be hurt in the near-term, higher software quality will likely benefit the franchise and improve EA’s reputation. EA is 21% higher than its pre-breakout price of $17.50, but should investors consider holding a position on the company?

Battlefield 4 issues

The fix for
China Rising, a DLC for BF4 on the PlayStation 4 was also delayed, as the team at DICE spends time
fixing bugs and server limitations on BF4. By allocating efforts towards fixing the game, releases of
Battlefront and
Mirror’s Edge could also be pushed back, although
Star Wars Battlefront seems likely to receive a warm welcome by game players.

The delay is likely to slow revenue growth in the coming quarters, as BF4 problems are addressed. However these issues are only temporary, and once resolved investors could see demand for the company's games pick up again.

Meanwhile, in the rest of the sector…​

Activision (ATVI) is a steadier performer, although its shares have been flat for the last three months. Shares rose in the summer after
Vivendi (OTC:VIVHY), a majority shareholder, sold a large portion of its holdings back to Activision.

The company is also benefiting greatly from the console refresh. Its
Call of Duty: Ghosts on the PlayStation 4 was the #1 most played game, according to
recent reports. The game is also set to become #1 in sales on
Microsoft’s (MSFT) Xbox One.

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And
Take-Two Interactive Software (TTWO) may have peaked around $19 in August, and dropped steadily after
Grand Theft Auto V was released. Shares rose in 2013 on the hope that Carl Icahn would take an activist role to boost the value in the company. Instead, Take-Two
bought out Icahn’s shares for around $16.93 each.

Risks for EA

Quality issues for BF4 suggest bugs could creep up for
Battlefront when it is released. The resources spent fixing BF4 will mean that development for other game titles might be delayed. Operational costs could be expected to rise, to boost resources for quality assurance and to speed up game development. This will all weigh on the results in the coming quarters.

Let the storm settle

The downtrend for EA may continue as investors grow more worried about the short-term prospects. EA’s move to address quality issues now will pay off in the long-run, but a disappointing outlook may still weigh on shares.